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22 Sept 2017

European Parliament Publishes Study on Trade Scenarios in a Post-Brexit Europe: Significant Impact on Traders Inevitable

On 9 August 2017, the European Parliament published a Study on the Legal Implications of Brexit. The study covers key trade aspects such as the EU’s customs union, the internal market for goods and services, consumer protection law and public procurement. The Study offers an analysis of four different Brexit scenarios. Each of these will have an impact on Hong Kong exporters to the UK, and those who import into the EU via the UK.

Continuing membership of the EU is taken as a baseline reference point, with a WTO-based ‘hard’ Brexit at the other extreme. Between these are the UK’s possible membership of the European Economic Area (EEA) or a tailored free trade agreement (FTA) between the EU and UK. The Study emphasises that its analysis of the various trade scenarios is necessarily tentative, given the lack of progress on negotiations at political level.

Customs Union: It will be recalled that on 15 August 2017 the UK Government presented a paper discussing the arrangements for new customs arrangements between the UK and the EU (see: UK Reveals Ambitious ‘Customs Union’ Plan in Newly Published Paper). Hong Kong businesses exporting to both markets will recall that the UK Government aspires to streamline its trading systems as far as possible, so as to allow for a minimal UK-EU customs border. Nonetheless, much work will need to be done in order to make this aspiration a reality.

The worst-case hard Brexit scenario would see the UK withdraw completely from the Customs Union. This would result in the introduction of tariffs on UK-EU trade and the absence of rules of origin. If the UK sets its own tariffs, this will affect the freedom of overseas business to access the EU’s Internal Market. As a result, other WTO members may put pressure on the UK to reduce tariff rates to compensate for this inconvenience.

Similarly, overseas businesses will suffer additional administrative and procedural burdens in the absence of a most-favoured nation agreement between the EU and UK. The UK Government, not having its own schedule of concessions, has indicated a willingness to adopt goods and services schedules based on the most recent certified EU schedules. This would serve to minimise disruption in the period following Brexit, but divergent schedules are possible thereafter.

EEA membership would not necessarily improve matters, as there is no common customs tariff applicable to goods imported into the EEA and these goods are subject to rules of origin. The UK House of Lords has noted the significant value of UK exports which are derived from foreign components. Businesses which rely on the UK as an entry point to the EU’s Internal Market will need certainty in this regard, especially regarding sectors which fall outside the scope of the EEA Agreement.

Alongside these ‘off the peg’ models, the Study notes that existing free trade agreements, such as the Deep and Comprehensive Free Trade Area encompassing the EU, Ukraine, Moldova and Georgia, offer some guidance for a tailored approach. Such an approach would permit the EU and the UK to agree to assume mutual recognition or to suspend rules of origin in all industries where the UK consents to maintaining the same external tariffs as it has now.

Internal market in goods: The degree of disruption to the operation of the Internal Market will depend on the extent of divergence between UK domestic standards and the current EU rules. The area with the higher standards in, for instance, product safety, will be able to exclude non-compliant products originating in the jurisdiction with lower standards.

In the event of a hard Brexit, Hong Kong exporters may wish to prepare for the possibility, subject to WTO commitments, of the UK imposing trade defence measures and otherwise freely conducting its own external trade policy. In practice, a free trade agreement between the UK and EU would be likely to eliminate most tariff barriers; nonetheless, the European Parliament Study notes that ‘compliance with rules of origin requirements would introduce a significant additional administrative burden, with a particularly negative impact on sectors with a highly integrated EU supply chain. Companies in these sectors might be unable to comply with the local content requirements contained in the EU’s preferential rules of origin’.

For the purposes of the Internal Market, EEA membership is equivalent to EU membership. As regards external trade, however, the UK would conduct an independent policy and would have the possibility to impose trade defence measures.

A tailored FTA could ease trading difficulties by including rules on mutual recognition of testing and certification of standards for goods. While both the EU and UK could adopt a sectoral approach, extending or restricting mutual recognition according to economic and political priorities, a high level of harmonisation in this regard would be most beneficial to businesses such as those trading from Hong Kong, seeking to export the same products to both the UK and the EU.

Consumer protection: As a branch of private law, consumer protection falls within the Brussels and Rome conventions, a series of regulations which govern civil and commercial disputes within the EU. This EU-based regime replaced a more traditional intergovernmental treaty-based approach which continues to govern conflicts-of-laws issues in relations with third countries.

The default position under a hard Brexit scenario would be for private international law to revert to the pre-Brussels and Rome Regulations position, namely to the 1968 Brussels and 1980 Rome Conventions. As these treaties were superseded by EU regulations but never renounced, they would be ‘revived’ once the existing EU regulations cease to apply. The Rome Convention provides that the law of the country where the consumer has their habitual residence applies to a civil dispute. This would also be likely to occur if a future FTA does not address the issue expressly.

The EEA Agreement, by contrast, mirrors almost all EU consumer protection law and provides for the dynamic adoption of new EU secondary law. For the area of judicial cooperation in civil matters, however, the Brussels and Rome regimes do not apply. The Lugano Convention, essentially replicating the Brussels Convention, covers questions of jurisdiction and the recognition and enforcement of judgments in disputes concerning non-EU (i.e., EFTA) Member States.

Whilst the Study focuses primarily on the legal effects of Brexit from the perspective of the remaining EU-27, Hong Kong traders may find its analysis useful in understanding the various possible shapes of a future EU-UK trading relationship, and its implications for businesses seeking to export to both markets. Please click on the following to view the full Study.

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